Air France-KLM Faces Up to Bleak Future

Ania Nussbaum , Bloomberg

- Jan 12, 2017 9:00 pm

Skift Take

Air France-KLM has yet to solve any of the problems that have been dogging it and other legacy carriers. And with rising oil prices on the horizon it looks like 2017 is going to be another difficult year.

— Patrick Whyte

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Air France-KLM Group Chief Executive Officer Jean-Marc Janaillac delivered a downbeat assessment of the carrier’s prospects for 2017, saying it faces “difficult” times in the year ahead amid rising oil prices and an ongoing struggle to rein in expenses.

Weak margins combined with high debt remain the greatest challenges to Europe’s biggest airline, Janaillac said in an address at a press reception in Paris late Wednesday. He declined to comment on the status of talks with pilots linked to the cost-cutting drive, citing the need to build trust with unions.

“We will have to face the increase of oil prices, of the dollar, and an increase in interest rates, and this while our profitability is weak and we have a high debt without the option of appealing to our shareholders, given our weak stock valuation,” the CEO said.

The new chief, whose background is in buses and trains, has taken a more conciliatory approach, though the rise in oil costs against a background of falling fares tied to a glut in capacity will only heighten the pressure to deliver savings. Passenger numbers at the Air France arm slipped 1.4 percent last year, and the group relied on Transavia and Dutch division KLM for gains.

IATA Warning

Deutsche Lufthansa AG, where traffic grew faster than at Air France-KLM in 2016, last week issued guidance for yields and fuel costs that analysts said pointed to a profit decline this year. The International Air Transport Association, now led by de Juniac, warned in December that European airline earnings would slump 25 percent, depressed by “intense competition” and the threat of terrorist attacks.

The new head of the Air France brand, Franck Terner, said at the reception that he’ll introduce a management revamp on Jan. 26. He has said previously that the changes will restructure a business held back by “widely recognized limits and complexities.”

Plans for a new French long-haul carrier, dubbed Boost, with a lower cost base are advancing ahead of its introduction next winter, starting with medium-sector routes and extending into intercontinental services in summer 2018.

Discussions with pilots about the airline, which Janaillac said will be positioned in “the most competitive markets,” should be completed before the end of March. Lufthansa already operates lower-cost long-haul services via its Eurowings brand and British Airways said on Dec. 22 that it will introduce a similar service starting with flights from Barcelona next summer.

Janaillac said that 2016 was broadly positive overall, despite factors including the spate of terrorist attacks on French soil that discouraged travel, the squeeze from Persian Gulf operators and the emergence of new competitors such as French Blue and Norwegian Air Shuttle ASA.

”All of this creates some overcapacity compared to demand that grows, but not as much,” he said. Air France-KLM will report full-year earnings on Feb. 16.